Exhibit 99.2
HealthMEDX, LLC
Financial Statements
For the Three and Nine Month Period Ended September 30, 2016
(Unaudited)
HealthMEDX, LLC
Contents
HealthMEDX, LLC
Balance Sheets
(Unaudited)
| | September 30, 2016 | | | December 31, 2015 | |
Assets | | | | | | | | |
Current Assets | | | | | | | | |
Cash and cash equivalents | | $ | 4,869,325 | | | $ | 3,600,102 | |
Accounts receivable, net of allowance; 2016 – $230,000, 2015 – $825,000 | | | 3,758,369 | | | | 4,070,879 | |
Unbilled revenue | | | 485,076 | | | | 610,568 | |
Prepaid expenses and other | | | 569,017 | | | | 519,277 | |
Total current assets | | | 9,681,787 | | | | 8,800,826 | |
Property and Equipment, at Cost | | | | | | | | |
Less Accumulated Depreciation and Amortization | | | 1,895,375 | | | | 2,027,361 | |
Other Assets | | | | | | | | |
Goodwill, net of accumulated amortization | | | 8,401,198 | | | | 9,270,288 | |
Other intangible assets, net | | | 4,148,265 | | | | 4,594,763 | |
Software intangible assets, net | | | 4,230,997 | | | | 3,637,751 | |
| | | 16,780,460 | | | | 17,502,802 | |
Total assets | | $ | 28,357,622 | | | $ | 28,330,989 | |
| | | | | | | | |
Liabilities and Members’ Equity | | | | | | | | |
Current Liabilities | | | | | | | | |
Current maturities of capital lease obligations | | $ | 836,345 | | | $ | 667,703 | |
Accounts payable | | | 466,919 | | | | 441,760 | |
Accrued expenses | | | 975,194 | | | | 802,609 | |
Accrued interest on related party note payable | | | 1,260,891 | | | | 1,029,177 | |
Deferred revenues | | | 4,364,902 | | | | 5,782,310 | |
Total current liabilities | | | 7,904,251 | | | | 8,723,559 | |
Related Party Note Payable | | | 10,400,000 | | | | 10,400,000 | |
Capital Lease Obligations | | | 551,081 | | | | 653,851 | |
Members’ Equity | | | | | | | | |
Preferred membership units (aggregate 9% preferred return; $30,199,686 at September 30, 2016 and $24,593,532 at December 31, 2015) | | | 56,000,000 | | | | 56,000,000 | |
Retained members’ deficit | | | (46,497,710 | ) | | | (47,446,421 | ) |
Total members’ equity | | | 9,502,290 | | | | 8,553,579 | |
Total liabilities and members’ equity | | $ | 28,357,622 | | | $ | 28,330,989 | |
See Notes to Financial Statements
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HealthMEDX, LLC
Statements of Operations
(Unaudited)
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Revenues | | $ | 7,919,000 | | | $ | 6,584,709 | | | $ | 20,764,756 | | | $ | 19,619,784 | |
Cost of Revenues | | | | | | | | | | | | | | | | |
Direct costs | | | 2,278,000 | | | | 2,608,000 | | | | 7,078,000 | | | | 8,152,000 | |
Amortization of contracts in process | | | - | | | | 33,599 | | | | - | | | | 100,796 | |
| | | 2,278,000 | | | | 2,641,599 | | | | 7,078,000 | | | | 8,252,796 | |
Gross Profit | | | 5,641,000 | | | | 3,943,110 | | | | 13,686,756 | | | | 11,366,988 | |
Operating Expenses | | | | | | | | | | | | | | | | |
Product development | | | 841,222 | | | | 1,223,780 | | | | 3,245,000 | | | | 3,918,057 | |
Sales and marketing | | | 674,000 | | | | 978,000 | | | | 2,229,000 | | | | 3,347,000 | |
General and administrative | | | 1,372,000 | | | | 1,146,000 | | | | 3,186,002 | | | | 3,551,338 | |
Depreciation and amortization | | | 1,284,516 | | | | 2,195,795 | | | | 3,812,264 | | | | 6,644,625 | |
| | | 4,171,738 | | | | 5,543,575 | | | | 12,472,266 | | | | 17,461,020 | |
Operating Income (Loss) | | | 1,469,262 | | | | (1,600,465 | ) | | | 1,214,490 | | | | (6,094,032 | ) |
Other Income (Expense) | | | | | | | | | | | | | | | | |
Interest expense | | | (87,596 | ) | | | (81,684 | ) | | | (265,844 | ) | | | (245,901 | ) |
Interest income | | | - | | | | 97 | | | | 66 | | | | 330 | |
| | | (87,596 | ) | | | (81,587 | ) | | | (265,778 | ) | | | (245,571 | ) |
Net Income (Loss) | | $ | 1,381,666 | | | $ | (1,682,052 | ) | | $ | 948,712 | | | $ | (6,339,603 | ) |
See Notes to Financial Statements
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HealthMEDX, LLC
Statements of Cash Flows
(Unaudited)
| | Nine Months Ended September 30, | |
| | 2016 | | | 2015 | |
Operating Activities | | | | | | | | |
Net income (loss) | | $ | 948,712 | | | $ | (6,339,603 | ) |
Items not requiring cash | | | | | | | | |
Depreciation and amortization | | | 3,812,264 | | | | 6,745,421 | |
Payment-in-kind interest | | | 231,715 | | | | 226,063 | |
Provision for doubtful accounts | | | (98,496 | ) | | | 245,888 | |
Changes in | | | | | | | | |
Accounts receivable and unbilled revenue | | | 1,021,575 | | | | 2,396,314 | |
Accounts payable and accrued expenses | | | 197,745 | | | | (774,965 | ) |
Deferred revenues | | | (1,417,408 | ) | | | (860,582 | ) |
Other current assets | | | (556,104 | ) | | | (893,460 | ) |
Net cash provided by operating activities | | | 4,140,003 | | | | 745,076 | |
Investing Activities | | | | | | | | |
Purchase of property and equipment | | | (210,036 | ) | | | (420,223 | ) |
Payment for capitalized software development costs | | | (2,112,480 | ) | | | (1,350,313 | ) |
Net cash used in investing activities | | | (2,322,516 | ) | | | (1,770,536 | ) |
Financing Activities | | | | | | | | |
Principal payments on long-term capital lease obligations | | | (548,264 | ) | | | (493,940 | ) |
Net cash used in financing activities | | | (548,264 | ) | | | (493,940 | ) |
Increase (decrease) in Cash and Cash Equivalents | | | 1,269,223 | | | | (1,519,400 | ) |
Cash and Cash Equivalents, Beginning of Year | | | 3,600,102 | | | | 4,685,737 | |
Cash and Cash Equivalents, End of Year | | $ | 4,869,325 | | | $ | 3,166,337 | |
See Notes to Financial Statements
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HealthMEDX, LLC
Notes to Financial Statements (Unaudited)
September 30, 2016
Note 1: | Nature of Operations and Summary of Significant Accounting Policies |
Nature of Operations
HealthMEDX, LLC (the “Company”) was formed in 2011 to acquire substantially all of the assets and liabilities of HealthMEDX, Inc., the predecessor company. The Company earns revenues predominately from sales of subscriptions, perpetual licenses and related maintenance to software products and solutions and from providing related implementation, training and other consulting services for long-term care, home health, hospice and rehabilitation organizations. The Company’s proprietary software, HealthMEDX Vision, provides a comprehensive solution to automate customer relationship management and clinical electronic health records. The Company is headquartered in Ozark, Missouri.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Information
The unaudited interim financial statements as of and for the three and nine months ended September 30, 2016 and 2015 have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These interim financial statements are unaudited and, in the opinion of our management, include all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the consolidated financial statements for the periods presented in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year ending December 31, 2016.
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with the SEC's rules and regulations for interim reporting, although the Company believes that the disclosures made are adequate to make that information not misleading. These unaudited interim financial statements should be read in conjunction with the financial statements and related notes for the year ended December 31, 2015.
Significant Accounting Policies
There have been no changes to our significant accounting policies from those disclosed in our financial statements and related notes for the year ended December 31, 2015.
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Note 2: | Intangible Assets and Goodwill |
The carrying basis and accumulated amortization of recognized intangible assets at September 30, 2016 and December 31, 2015 were:
| | September 30, 2016 | | | December 31, 2015 | | | |
| | Gross | | | | | | | Gross | | | | | | | |
| | Carrying | | | Accumulated | | | Carrying | | | Accumulated | | | Amortization |
| | Amount | | | Amortization | | | Amount | | | Amortization | | | Period |
Software intangible assets | | | | | | | | | | | | | | | | | | |
Software development costs acquired | | $ | 7,000,000 | | | $ | 7,000,000 | | | $ | 7,000,000 | | | $ | 7,000,000 | | | 4 years |
Software development costs capitalized | | | 9,422,662 | | | | 5,191,665 | | | | 7,310,182 | | | | 3,672,431 | | | 3 years |
| | | 16,422,662 | | | | 12,191,665 | | | | 14,310,182 | | | | 10,672,431 | | | |
Other intangible assets | | | | | | | | | | | | | | | | | | |
Customer relationships | | | 4,631,969 | | | | 1,856,753 | | | | 4,631,969 | | | | 1,567,255 | | | 12 years |
Trade name | | | 2,000,000 | | | | 641,370 | | | | 2,000,000 | | | | 541,370 | | | 15 years |
Non-compete agreement | | | 380,000 | | | | 365,581 | | | | 380,000 | | | | 308,581 | | | 5 years |
Contracts in process | | | 5,508,126 | | | | 5,508,126 | | | | 5,508,126 | | | | 5,508,126 | | | 1 - 3 years |
| | | 12,520,095 | | | | 8,371,830 | | | | 12,520,095 | | | | 7,925,332 | | | |
Goodwill | | | 16,544,496 | | | | 8,143,298 | | | | 16,544,496 | | | | 7,274,208 | | | 10 years |
| | $ | 45,487,253 | | | $ | 28,706,793 | | | $ | 43,374,773 | | | $ | 25,871,971 | | | |
Amortization expense for the three and nine months ended September 30, 2016 was $937,488 and $2,834,821, respectively. Amortization expense for the three and nine months ended September 30, 2015 was $2,006,883 and $6,034,096, respectively. This included amortization of a discount of deferred revenue relating to value assigned to customers acquired from the predecessor company. Estimated amortization expense for each of the following five years and thereafter is:
2017 | | | 3,996,387 | |
2018 | | | 3,777,211 | |
2019 | | | 3,287,060 | |
2020 | | | 3,803,417 | |
2021 and thereafter | | | 1,916,385 | |
| | $ | 16,780,460 | |
Notes payable, including the note with related party further discussed in Note 5, at September 30, 2016 and December 31, 2015 consists of the following:
| | September 30, 2016 | | | December 31, 2015 | |
Note payable, ACD Holdings, Inc. (A) | | $ | 10,400,000 | | | $ | 10,400,000 | |
Capital leases (B) | | | 1,387,426 | | | | 1,321,554 | |
| | | 11,787,426 | | | | 11,721,554 | |
Less current maturities | | | 836,345 | | | | 667,703 | |
| | $ | 10,951,081 | | | $ | 11,053,851 | |
| (A) | Note payable to former owners; unpaid principal and interest due on December 9, 2016; interest accruing at an annual rate of 2.5% and payable in arrears annually beginning on December 9, 2012; deferred interest payable of $231,715 and $1,029,177, included in current liabilities at September 30, 2016 and December 31, 2015, respectively; note is subject to express subordination described below; secured by substantially all assets of the Company. |
| (B) | Capital leases include leases covering data processing equipment and software; monthly payments ranging from $6,782 to $30,855; expiring on various dates between 2017-2019. |
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The note payable to ACD Holdings, Inc. is expressly subordinated to any indebtedness (senior indebtedness) of the Company except for indebtedness from related parties, capital leases and other specific instruments. This subordination results in the deferral of required principal payments on the note payable until the senior indebtedness is paid in full or in the event of Company liquidation. When under subordination to senior indebtedness, interest is payable quarterly at the default rate of the senior indebtedness but not to exceed 7.5%.
On March 11, 2016, the Company entered into a revolving line of credit with bank for the use of proceeds up to $5,000,000. Interest is payable at a variable rate based on the sum of prime rate, applicable LIBOR index and applicable margin but not less than 2.5%. The revolving line matures on March 11, 2018.
The note payable to ACD Holdings, Inc. is subordinated to the revolving line senior indebtedness resulting in the classification of note payable as long-term. All accrued and outstanding interest remains currently payable by September 30, 2016.
Aggregate annual maturities of long-term debt and payments on capital lease obligations at September 30, 2016 are:
| | Long-term | | | | | |
| | Debt | | | Capital | |
| | (Excluding | | | Lease | |
| | Leases) | | | Obligations | |
Remainder of 2016 | | $ | — | | | $ | 192,144 | |
2017 | | | — | | | | 782,606 | |
2018 | | | 10,400,000 | | | | 421,794 | |
2019 | | | — | | | | 41,496 | |
| | | 10,400,000 | | | | 1,438,040 | |
Less amount representing interest | | | — | | | | 50,615 | |
Present value of future minimum lease payments | | $ | 10,400,000 | | | $ | 1,387,425 | |
Property and equipment include the following property under capital lease:
| | September 30, 2016 | | | December 31, 2015 | |
Computer hardware/software | | $ | 5,779,546 | | | $ | 3,655,936 | |
Less accumulated depreciation and amortization | | | 3,884,171 | | | | 2,320,858 | |
| | $ | 1,895,375 | | | $ | 1,335,078 | |
On December 9, 2011, the Company started an incentive equity plan (the Plan), which as amended, permits the grant of 122,654 Common Units to employees or other individuals providing services to the Company. Upon the issuance of any Common Units through the Plan, management specifies a distribution threshold which is at least equal to the minimum amount determined by management to be necessary to cause the Units to constitute a profits interest. Awards generally vest over five years and are intended to entitle the recipient to a distribution of the Company’s profits accrued after the date of issuance. A total of 98,325 Units were granted as of September 30, 2016. The Company accounts for this plan under the provisions of Accounting Standards Codification (ASC) Topic 718. No fair value disclosures with respect to equity awards are presented because, in the opinion of management, such values do not have a material effect.
Note 5: | Related Party Transactions |
The Company leases an office space from an entity controlled by the former owners, including a current executive of the Company. The lease expires in 2018. Total rental payments made to this affiliated entity were $56,400 and $169,200 for both the three and nine months ended September 30, 2016 and 2015, respectively.
The Company has a note payable with the same affiliated entity noted above. The note is more fully explained in Note 3. Accrued interest payable of $231,715 and $1,029,177 is included in current liabilities at September 30, 2016 and December 31, 2015, respectively. All accrued and outstanding interest is payable in December 2016.
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On October 27, 2016, the Company was acquired by Netsmart, Inc., a Delaware corporation (“Netsmart”) for a purchase price of $36,295,000, subject to customary adjustments for net debt, working capital and transaction expenses. The Company unitholders are also entitled to earn up to an additional $3,500,000 based on the Company achieving certain revenue milestones in 2017, all on the terms and conditions set forth in the definitive agreement regarding the acquisition.
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